The Price Is Not Always Right: On the
Impacts of Commodity Prices on
Households (and Countries)
Daniel Lederman
1
and Guido Porto
2
This paper provides an overview of the impact that one-time changes in commodity and
other prices have on household welfare. It begins with a collection of stylized facts related to
commodities based on household survey data from Latin America and Africa. The data un-
covers strong commodity dependence on both regions: households typically allocate a large
fraction of their budget to commodities, and they often also depend on commodities to earn
their income. This income and expenditure dependency suggests sizable impacts and adjust-
ments following commodity price shocks. The article explores these effects with a review of
the relevant literature. The authors study consumption and income responses, labor market
responses, and spillovers across sectors. The paper provides evidence on the relative magni-
tudes of various mechanisms through which commodity prices affect household (and na-
tional) welfare in developing economies. Commodity price changes, Poverty and welfare
impacts, Net consumers and net producers. JEL codes: I30, O13, Q17
Energy prices rose more than 140% between 2000 and 2013, according to the
World Bank’s energy-price index, while the food-price index rose by more than 80%.
3
These increases in commodity prices motivated researchers to assess the implications
for households and workers in developing countries, as well as policy responses. An
example of such research is the World Bank’s $4 billion contribution to a joint fund
with J.P. Morgan, launched on June 21, 2011, to help developing countries invest in
commodity-price hedging instruments.
4
Yet commodity prices have stalled since
2012, and observers are once again concerned about the social and economic conse-
quences of declining commodity prices.
5
Part of the concern is about the volatility of
commodity prices, as much as the medium-term trends, per se.
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Whether it is the trends or the volatility of commodity prices, knowledge about
the effects of commodity-price fluctuations on household welfare is useful for policy
as much as it is useful for understanding economic behavior. It is also important to
have a sense of the magnitudes of the impacts involved.
The objective of this article is to put forth an economic framework for understand-
ing how people in developing countries are affected by relatively permanent changes
in commodity and other prices. The approach is to review the literature framed by a
model that highlights issues relevant in the discussion of prices and welfare. The litera-
ture review canvasses research from various branches, including shocks to exchange
rates, financial crises, and trade reforms. In all these cases, the shocks manifest them-
selves as price changes, and thus the findings are relevant for the discussion of
commodity prices. We complement the literature review with a detailed analysis
of household-survey data on commodity dependence in Latin America and Africa.
Since we are interested in the impact of commodity prices on household welfare
and behavior, our framework builds on agricultural household models. This frame-
work analyzes how households choose consumption bundles and how they earn
their living. In some cases, especially in rural areas, income is generated by agricul-
tural production ( profits). In other cases, where the economy is more industrialized,
wages and employment are the predominant sources of income, which can be
affected by commodity prices. Since prices can affect both consumption and
income, the simple framework opens the door to a discussion of how household
welfare is affected by changes in commodity prices, both in the short- and long-run.
The literature provides numerous empirical findings that can bring together
various pieces of the puzzle illustrated by the framework.
The paper is structured as follows. First, we review the literature on the first-
order impacts of price changes. These are the impacts that would take place if
households adjust neither the quantities of commodities that they consume nor
change the sources of income they receive in response to the price change. The
article derives the commonplace net-consumer-versus-net-producer result, which
establishes that a price increase hurts net-consumers and benefits net-producers.
Second, we discuss spillovers from commodity prices to other sectors. This refers
to, for instance, whether households adjust all consumption choices in response to
higher food prices, or whether only food expenditures are affected. We include a dis-
cussion of scenarios where commodities are used as inputs into the production of
other goods. Consequently, changes in commodity prices (such as oil) may affect the
cost, and thus the price, of certain goods (such as transport). Finally, we also report
evidence on spillovers in employment and wages; changes in food prices can affect
wages and employment not only in the food sectors (primary, agro-manufacturers)
but also in non-food sectors.
Third, the article reviews how prices are transmitted to the local economy.
Because commodities are traded in international markets, most of the shocks
Lederman and Porto 169
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associated with commodity prices are global. Consequently, a relevant question is to
what extent do changes in international prices pass through to domestic markets?
Fourth, the article explores available evidence on consumption and production
responses. Here, we review how consumers adjust the quantity and quality of the
consumption basket, as well as other behavioral responses associated with con-
sumption. We also explore some of the patterns of adjustment in production, partic-
ularly supply responses in agriculture.
It is important to mention at the outset that there are at least five related litera-
ture surveys. These include Winters, McCulloch, and McKay (2004) and Goldberg
and Pavcnik (2004), both of which cover trade liberalization and poverty; Goldberg
and Pavcnik (2007) and Harrison, McLaren, and McMillan (2011), which cover
trade and the distribution of income; and Lederman (2013), which covers trade and
inclusive growth. Our review complements this work by merging issues of poverty
with issues of inequality. Furthermore, we have a somewhat narrower focus, as we
are mainly interested in commodity prices, but we take a somewhat deeper look at
some of these issues, all in the context of a general framework.
The rest of this paper is organized as follows. The following section presents an
overview of household commodity dependence in Latin America and Africa. Using
various household income and expenditure surveys from Latin American and
African countries, we estimate the average budget shares spent on commodity-
related sectors (mostly food and energy), and the average income share derived
from commodity-related sectors (agriculture, forestry, fishing, mining, food manu-
factures, and energy). The data reveal strong commodity dependence on both
regions. The next section introduces the analytical framework and reviews the liter-
ature that measures those effects using data from developing countries. The impli-
cations of price changes for net-consumers and net-producers are central to this
analysis, with labor markets, various types of spillovers across markets, and imper-
fect price transmission of border prices all playing fundamental supporting roles in
the story. The subsequent section turns to departures from first-order effects and
studies the role of household adjustments in production and consumption. This is
followed by a simple example of the magnitudes of the different channels identified
in the paper using Mexican data, while the final section concludes.
Commodity Dependence: Stylized Facts
This section characterizes the dependence on commodities of households in develop-
ing countries. To study dependence on consumption, we focus on expenditure shares
spent on items related to commodities, mainly food and energy. Households’ depen-
dence on commodities on the income side is then measured by income shares in
agriculture (including forestry and fishing), mining, food manufactures (beverages,
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food, and tobacco), and energy. An important aspect of the analysis is related to
poverty and inequality, because dependence on commodities either on the consump-
tion or the income side can vary across quintiles of the income distribution during a
given point in time.
Regarding commodity-dependence on the consumption side, table 1 presents the
average expenditure shares on commodities for eight Latin American countries and
19 African countries.
6
In Latin America, there is significant cross-country variation
in the average share spent on commodities, ranging from an average share of 71.3
percent in Bolivia to 31.7 percent in Mexico. A common feature in all these coun-
tries is that the share of commodity expenditures decreases across quintiles. This is
Table 1. Commodity Expenditure Shares, Latin America and Africa
Quintiles p/c expenditures
Total
(1) (2) (3) (4) (5)
Argentina 61.8 48.9 42.3 37.5 29.0 43.9
Bolivia 82.9 78.7 73.0 67.6 54.4 71.3
Colombia 80.1 69.1 61.7 55.6 41.6 61.6
El Salvador 65.2 59.6 54.6 49.4 39.0 53.5
Mexico 40.6 36.2 32.4 28.4 20.8 31.7
Nicaragua 63.5 60.9 57.3 54.4 41.6 55.5
Panama 60.0 49.0 43.9 37.4 28.3 43.7
Peru 60.1 50.6 42.6 35.8 26.1 43.0
Burundi 56.3 60.7 63.1 61.9 53.2 59.1
Benin 65.5 63.8 62.9 59.8 56.5 61.7
Burkina Faso 77.1 72.5 67.4 60.9 48.0 65.2
Co
ˆ
te d’Ivoire 57.2 56.6 55.8 49.3 39.4 51.6
Cameroon 71.7 69.7 67.1 62.3 53.3 64.8
Ethiopia 84.0 79.7 77.0 70.5 55.5 73.3
Ghana 71.2 68.5 67.1 66.6 65.4 67.8
Gambia 67.6 71.3 71.0 70.9 68.6 69.9
Guinea Bissau 74.5 76.6 76.5 77.3 71.5 75.3
Kenya 85.0 82.7 80.7 76.6 67.8 78.5
Madagascar 89.6 90.5 90.7 90.6 88.1 89.9
Mali 79.5 74.4 73.1 67.5 68.8 72.7
Malawi 81.2 79.9 78.4 74.9 69.2 76.7
Nigeria 92.4 82.6 81.6 80.5 74.7 82.3
Rwanda 78.8 69.1 60.8 49.7 27.7 57.2
Senegal 63.7 63.2 62.7 59.8 54.7 60.8
Tanzania 90.0 88.4 85.8 82.9 74.9 84.4
Uganda 74.7 75.5 71.9 67.1 53.0 68.4
South Africa 63.6 55.7 46.7 32.1 15.6 42.7
Note: Authors’ own elaboration based on household surveys.
Lederman and Porto
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expected due to Engel’s Law: richer households typically spend a smaller share of
their total expenditures on food. In Bolivia, for example, the average commodity
share is 82.9 percent in the first quintile and 54.4 percent at the top quintile. In
Mexico, the average share of the bottom quintile is 40.6 percent and it is 20.8
percent at the top. In Colombia, the poorest households spend, on average, 80.1
percent on commodities; the richest households spend 41.6 percent. Differences in
the populations covered by the surveys across countries (i.e., urban versus rural
populations) can clearly account for part of the differences in the average commodi-
ty expenditure shares. Nevertheless, the data reveal a very high commodity depen-
dence on the consumption side, especially for the poorest households. In Africa,
there is also significant variation across countries, from a minimum average share
of 42.7 percent in South Africa, to 84.4 percent in Tanzania, and a maximum of
89.9 percent in Madagascar. The commodity dependence on consumption seems
higher in Africa than in Latin America, however. In most countries, commodity de-
pendence in consumption is more prevalent at the bottom of the quintile distribu-
tion. This means that Africa and Latin America are both highly dependent on
commodities and, moreover, this dependence declines with household income. This
pattern explains the literature’s concerns about the poverty impacts of commodity
price hikes.
Table 2 turns to dependence on the income side. The aim is to measure the share
of household income derived from commodities, including income from employ-
ment (wages) and self-employment (for instance, agricultural home production).
Starting with Latin American data for 2004, Table 2 reports the total combined
share of income derived from commodities, which varies widely across countries.
This comparison, however, is unlikely to be very useful because of differences in cov-
erage. An example of this is Argentina, which despite being a country with a rela-
tively important agricultural sector, the household survey suggests that only 3.2
percent of household income is, on average, derived from commodities. This is
clearly more a manifestation of the urban focus of the survey than of the economy.
In the discussion that follows, it is thus convenient to focus more on within-country
comparisons across quintiles. A regularity in most of our Latin American data is
that lower quintiles exhibit higher shares of income derived from “commodities.”
The differences are sometimes important. In Paraguay, for instance, while the
bottom quintile earns 44.4 percent of income from commodities, the top quintile
earns only 14.7 percent.
We uncover similar patterns in the African data. The income commodity depen-
dence in Africa is very high (higher than in Latin America) and varies across coun-
tries. The lower quintiles also tend to show higher commodity dependence. In
Ghana, for instance, the share of income derived from commodities is 71.4 in the
first quintile, and 27.1 in the top quintile. Table 2 shows that in the data, most of
the dependence from commodities in Africa is related to dependence on agriculture.
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